Sensex Trading on a Volatile Note; Energy Stocks Witness Buying

After opening the day flat share markets in India are trading on a volatile note and are presently trading above the dotted line. Sectoral indices are trading on a mixed note, with stocks in the energy sector and stocks in the PSU sector witnessing maximum buying interest.

The BSE Sensex is trading up by 82 points (up 0.2%) and the NSE Nifty is trading up by 30 points (up 0.3%). Meanwhile, the BSE Mid Cap index is trading down by 1.2%, while the BSE Small Cap index is trading down by 1%. The rupee is trading at 73.97 to the US$.

In news from stocks in the IPO space. Aavas Financiers made a weak debut on the bourses today as it opened at a discount to it issue price. The IPO debuted at Rs 746, a 9% discount to its issue price of Rs 821

The IPO raised Rs 17.3 billion and comprised of fresh issue of up to Rs 4 billion and an offer for sale of up to 1,62,49,359 equity shares, including anchor portion of 63,36,439 equity shares. Price band for the offer was set at Rs 818-821 per share.

In addition, Aavas Financiers had also raised Rs 5.2 billion from anchor investors.

Aavas Financiers offers housing loans to customers from low and middle income segments in semi-urban and rural areas.

At the time of writing, Aavas Financiers share price was trading down 0.7% from its opening price.

Speaking of IPOs, the stock market is gearing up for a burst of IPO activity.

According to EY India IPO Readiness Survey Report, globally, Indian exchanges recorded the highest IPO activity as the country saw 90 IPO launches that raised US$ 3.9 billion in the first half of this year.

We believe a merit-based selection, primarily including valuation, business, and management quality, is the logical way to go about investing in IPOs. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often.

What if one had invested in all the IPOs? How have the IPOs performed in 2017? And, have they outperformed the indices?

According to an article in Business Standard, an investor who bet on the 33 IPOs of 2017 (on a weighted average basis) has seen the value of investment rise by 17%. However, compared to broad market indices, the underperformance is a bitter disappointment.

Below chart clearly shows the underperformance of IPOs.

IPOs Underperform Broad Market Indices

 

Interestingly, if you take the Avenue Supermarts (D-mart) and HDFC Life out of the equation from the IPOs above, the gains drop to a meager 6%. Compared to this, the Sensex has gained 27%, while the small-cap index surged more than 50%.

What is the reason for this underperformance?

One of the key reasons IPOs have touched the altitude is due to a surge in the Indian equity market backed by liquidity and increasing investor demand for financial assets. Private equity investors and promoters took advantage of the absurd demand and came out with sky-rocket valuations. This is what we call a valuation bubble in the IPO market.

In our previous edition, we categorically stated:

• "With greed hypnotizing most folks, it is time for retail investors to exercise caution. While this does not mean that you should avoid IPOs lock, stock, and barrel; just ensure you do not end up paying higher valuations for a company that is yet to establish its worth".

During such times, it is imperative to be critically selective when investing in IPOs. Carefully analyze each company for its own merits and don't give in to the hype surrounding the public offering.

That's Ankit Shah's approach at Equitymaster Insider. He keeps an eagle-eye on the developments in the IPO space and updates his readers on the big-ticket IPOs.

Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It is free. Just click here.

Moving on to news from stocks in the banking sector. Yes, Bank share price was among the top gainers today after the bank announced that appointed a search committee to find the current CEO Rana Kapoor's, successor.

Company has appointed two former chairmen -- TS Vijayan of LIC and OP Bhatt of SBI to its search and selection committee to find the CEO's successor.

Notably, Yes Bank shares have plunged by nearly 50% from their 52-week highs after RBI's decision to cut short Rana Kapoor's tenure. On September 17, RBI curtailed the CEO's term to January 31, 2019, without citing any reason.

While the bank's board has initiated proceedings to find a new CEO it has also petitioned to the RBI to grant an extension to Rana Kapoor. The bank's board earlier said that it would ask the Reserve Bank of India (RBI) to grant an extension of eight months to managing director (MD) and chief executive Rana Kapoor.

The board will first seek an extension for Kapoor till 30 April for finalization of financial statements for the year to 31 March, and thereafter a further extension till 30 September for completing the annual general meeting process, it said in an exchange filing.